Tax Implications Of Selling Equity Shares Of An Unlisted Company: 5 Things To Know

Calculating taxation on listed shares is easy as listed equity shares meaning is pretty well known to most people. All you have to do is consider the investment amount and the holding period. If the shares are held for a period of more than 12 months and then you decide to share it, this will be considered a long-term capital gain, provided you make a profit out of it. Similarly, if the period of holding was less than 12 months, it will be considered a short-term capital gain. Taxation on long-term capital gain is charged at 10% whereas, for short-term capital gain, it is 15%. But what about the shares that are unlisted? And what is the tax rate applied to it? Let us try to understand the tax on unlisted shares in more detail.

Unlisted Equity Shares Meaning

The unlisted equity shares meaning is not much different from listed equity shares. The only difference here is that unlisted shares are not listed on the stock market. These shares are traded on the Over The Counter (OTC) market. Dealers or market markets facilitate the trading of unlisted equity shares in the OTC market. You can know more about unlisted equity shares to get a better idea of them for investing. Now that the unlisted equity shares meaning is cleared, it is important to understand the taxation on the same.

1.   Taxation on Long Term Capital Gains on Unlisted Shares

The gains made from the sale of equity shares are taxable according to the Income Tax Act, 1961. In case of a tax on long-term capital gains, the holding period of the unlisted equity shares has to be for over 24 months. This is slightly different from listed equity shares where the holding period for taxation on long-term capital gain has to be above 12 months. The rate of taxation is also different for unlisted equity shares on long-term capital gain where the tax is levied at the rate of 20%. For Non-Resident Indians, the rate is 10%.

2.   Taxation on Short Term Capital Gains on Unlisted Shares

The listed equity shares meaning for short-term capital gains is measured for a period up to or less than 24 months. The taxation on short-term capital gains is computed on the basis of the tax slab rate. If the gains you have made through the sale of unlisted shares within the period of 24 months falls within the tax slab only then you will have to pay taxes on the same. Otherwise, no taxation amount has to be paid on the income generated within the stipulated period.  

Tax Implications Of Selling Equity Shares Of An Unlisted Company: 5 Things To Know

Tax on short-term capital gain for unlisted equity shares is levied according to the income tax slab rates.

3.   FMV for Unlisted Shares

A special concept is put to use in unlisted equity shares meaning. It is called Fair Market Value or FMV. The company with the unlisted equity shares hired a merchant banker or a chartered accountant that determines the market value of the shares. In case the unlisted equity stocks are sold at a value lower than their FMV, then the FMV would be considered the actual selling price rather than the price at which the shares have been sold. FMV cannot be calculated by anyone. One needs to appoint a merchant banker or a chartered account to calculate an enterprise’s FMV.

4.   Indexation on Unlisted Equity Shares

There is merit in unlisted equity shares that you will not get in listed equity shares and that is indexation. Indexation is a method by the help of which shareholders can reduce the taxation amount on the gains made from selling their shares. What indexation does is that it increases the cost of acquisition of the share by factoring in inflation. If you bought shares in 2010 for the said price, what indexation will do is that it will increase the purchasing value of the shares by using inflation against it. This way, your gains will be computed to have been reduced for the value of a particular gain in 2010 will not be the same as it in 2020. Hence, the taxation amount will also be lower.

5.   Taxation of Unlisted Shares that are Gifted

If unlisted equity shares are gifted to someone, then there will be no taxation on the same. However, if the recipient of the gift decides to sell the shares then taxation will be applicable to them. The rate of taxation will be the same as that of any other shareholder of unlisted equity shares. An important thing to note here is that the cost of acquisition for the gains made will be calculated on the price at which the original owner bought the shares before gifting them to someone else.

When it comes to taxation, the unlisted equity shares meaning differs significantly from listed stocks. Hence, it is important to read about unlisted equity shares’ terms and conditions to get clear about the implication of taxation on the same.


Leave a Reply